An investigation into direct selling : information flow and supply chain structure

Abstract

Amid the rapid development of technology, an increasing number of suppliers sell directly as well as through the retail channel, competing with retailers in the market with uncertain demand. Each firm has exclusive access to a signal useful in updating market forecast. The quality of the signal received exclusively by a supplier is low when it adheres to the retail channel but improves after it engages in direct selling. Firms communicate signals along two directions. Competing suppliers or retailers may exchange signals in between, while suppliers may acquire retailers’ signals with payments. A firm can voluntarily share its undisclosed signals—including its exclusive signal and the signals received from information flow—with other firms through vertical interactions as per the specified decision sequence. Firms rely on available signals to decide prices and quantities. Direct selling by suppliers produces structure and information effects. The structure effect arises as suppliers gain flexibility in balancing sales across channels. The information effect arises as suppliers receive exclusive signals of improved quality and initiate signal acquisition from retailers, influencing the availability and utilization of signals among firms in responsive decision making. Channel structure, competition intensity, and cost of direct sales are important factors affecting suppliers’ incentive for direct selling and the magnitude of the arising structure and information effects on firms’ profit performance.